Value of information in portfolio selection, with a Taiwan stock market application illustration

Chiang Kao, Ralph E. Steuer

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

Abstract

Despite many proposed alternatives, the predominant model in portfolio selection is still mean-variance. However, the main weakness of the mean-variance model is in the specification of the expected returns of the individual securities involved. If this process is not accurate, the allocations of capital to the different securities will in almost all certainty be incorrect. If, however, this process can be made accurate, then correct allocations can be made, and the additional expected return following from this is the value of information. This paper thus proposes a methodology to calculate the value of information. A related idea of a level of disappointment is also shown. How value of information calculations can be important in helping a mutual fund settle on how much to set aside for research is discussed in reference to a Taiwan Stock Exchange illustrative application in which the value of information appears to be substantial. Heavy use is made of parametric quadratic programming to keep computation times down for the methodology.

Original languageEnglish
Pages (from-to)418-427
Number of pages10
JournalEuropean Journal of Operational Research
Volume253
Issue number2
DOIs
Publication statusPublished - 2016 Sep 1

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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